In the event of a catastrophe, insurance was meant to save Celia Hay's bacon. So when the building that housed Hay's Restaurant and the New Zealand School of Food and Wine was severely damaged in the February 2011 Christchurch earthquake, Hay was relieved that she'd been well insured for 17 years.

Lumley General Insurance (NZ), she thought, would repair the Victoria St building and pay business interruption insurance for the loss of rental income from the property, which Hay owned with a group of investors. And NZI would replace or repair the damaged fit-out and pay for the loss of profits from the restaurant and school until the businesses could reopen.

Never did Hay imagine that it would take 19 months before Lumley even decided whether to rebuild, her business interruption cover would run out, and the building would still be unusable.

Decisions by her insurers have wiped hundreds of thousands of dollars from her claims.

The businesses were successful enough for Hay to live comfortably and put three children through private school. They had an average turnover of $1.2 million a year and employed up to 20 full- and part-time staff.

On February 22 last year, 11 students were absorbed in cooking lamb navarin when the earthquake hit. The staff and students were shaken, but not hurt. After the dust settled, engineers declared it was too dangerous to go on using the building that housed the school and restaurant. Hay and her students relocated until the end of the current courses, and the restaurant closed for what she thought would be a couple of months until the building was repaired.

But so far only one of Hay's five claims, covering 12 months loss of rent on the building, has been paid in full. The business interruption claim on Hay's Restaurant was whittled down to a fraction of what she expected, the building insurer has only just made a verbal decision not to rebuild, the material damage claim hasn't been paid in full, and the business interruption claim for the school was stuck in no-man's land until this week. In the meantime, Hay has had to pull her children out of private school, is bleeding cash and faced insolvency action by a creditor.

Her tale, says Hay, is a lesson to anyone in business not to expect insurance to save them in a disaster.

To get back into business in Christchurch, Hay needed premises. The building, yellow-stickered after the quake, was covered by Lumley. The insurer, however, could not decide whether it was cheaper to demolish or reinstate, despite receiving its assessor's report in July last year which recommended rebuilding.

Lumley has apologised for the delays. "My over-arching comment in regard to it is we have taken far too long to come to a decision on this," says John Grant, Head of Earthquake Response at Lumley.

The insurance company's difficulty was that it was dealing with independent assessors, engineers and other experts, who were all too busy thanks to earthquake claims. Grant says Lumley has now contracted surveyors, certifying engineers and other professionals to work in its offices to speed claims processing.

Despite Lumley's commitment to settle the claim as soon as possible, Hay doesn't yet know how long it will take for the final payout to be negotiated.

Until she is paid by Lumley, the building remains closed and her businesses cannot reopen. In the meantime, her business interruption insurance on the building itself has run out, leaving a mortgage to be paid out of thin air.

The Catch-22 of Lumley's delay was that NZI, Hay's insurer for material damage to the fit-out and contents, could not pay in full until it was clear whether the building would be repaired or replaced.

The building claim is just one of Hay's insurance problems. Like many business owners, she assumed that when the crunch came, business interruption insurance would pay a sum based on the previous year's gross profit. The fine print, however, and new insurance industry practices said otherwise.

As many businesses have discovered since Christchurch started shaking, insurers can make "adjustments" to business interruption claims. Those adjustments can include reductions in payouts because of downward "trends" affecting a business. In Christchurch the adjustments have included the concepts of "depopulation" and "wider area damage", which emerged from Hurricane Katrina claims in the US.

In Hay's case, and others, the insurers argue that a downward trend in profits that started during the global financial crisis would have continued, so any payout should reflect the even smaller amount the insurance company believes the business would have made in the 12 months to February this year.

Of Hay's claims, the worst hit by the "trend" was Hay's Restaurant. Hay had expected the business interruption claim to be based on previous years' profits.

Her business adviser, Sue Sheldon, says business interruption payments are calculated on standard turnover from which a rate of gross profit is calculated, then any costs saved as a result of being closed are deducted.

"In looking at turnover the policy says it should be adjusted 'for the trend of the business' which is usually not defined [in the policy]," she says.

NZI spokesman Craig Dowling says the calculation was "evidence based", including a calculation for the downward "trend".

"A key point is that a policy's sum insured isn't the payment amount - it is the quantifiable amount (in accordance with the policy provisions) payable within the parameters set by the sum insured," says Dowling.

To date, says Hay, she has been paid $31,247 for business interruption on a business that turned over $500,000 the year before the earthquake. NZI says the payout was more than that, but the amount is confidential.

Insurance doesn't exist to make a person or business better-off than they would be otherwise. If profits are trending down or could be affected by other factors, the payout should reflect that, not the previous year's profits.

However Hay and Sheldon say work Hay had done on new revenue sources, that would turn the trend around, was ignored.

Ironically, says Sheldon, other top-end Christchurch restaurants have had huge financial windfalls from the earthquakes. With only a handful of top restaurants left in the city, their turnover has soared.

Hay says she was furious at the small payout for the restaurant. "I thought BI [business interruption] is about getting you back to where you were. That is absolutely not the case. I am being denied the right to get back to where I was."

Sheldon has other clients who have suffered from insurers' view that downward trends can only continue in that direction. "The insurers are not taking into account that a business might have done a lot of work to improve its position for the year that turned out to be immediately post-earthquake.

"Businesses in New Zealand were coming out of the global financial crisis. They were putting in place initiatives to pull out of this. Insurers are not taking account of any of that work." says Sheldon.

Auckland insurance lawyer Andrew Hooker has heard it all before. "The [insurance] assessor thinks they know more about your business than you do," he says. "They talk about how your business was going to perform, with no evidential basis. No matter how much you tell them about your predictions for the next 12 months, they don't want to listen."

When it became apparent that NZI would pay "virtually nothing" - in Hay's words - for the lost restaurant turnover, she turned her attention to the business interruption claim for the food and wine school, only to find that the insurer would again rely on the "downward trend" and other doctrines that arose from Hurricane Katrina to reduce its payout.

A common fallacy among business owners, says Hooker, was that business interruption claims would be triggered by the earthquake. They weren't. Firms were only covered for business interruption resulting from damage to their own premises caused by the quake. No damage, no claim - even though they might have no clients thanks to the cordon that kept potential customers out of the central city.

The insurers argue, says Hooker, that businesses behind the cordon with usable premises lost custom due to depopulation, not because of quake damage.

And even where a building was damaged, some businesses have found they're still not covered, says Hooker. In these cases the insurer's argument was that although the building or equipment was damaged, the cordon meant there would have been no business anyway, so there was nothing to pay out.

"Your problem is that no-one is coming in to buy your hamburgers and the insurance company says: 'stiff shit - the reason you have lost money is not due to your building being damaged'," says Hooker. "'No-one is buying your hamburgers because of the cordon, not the damage."'

At best, these companies can get limited payments if their policies included cover for prevention of access to their premises. However their main business interruption cover was not paid out.

If that wasn't enough, other businesses, including Hay's school, were told by their insurers that damage to the wider region kept tourists and other visitors away. Hay was told by NZI's assessor that overseas students would be deterred from coming to Christchurch, and it adjusted her claim accordingly.

The principles of depopulation and wider area damage emerged from a court case following Hurricane Katrina. In that case, the insurer argued that the Orient Hotel in New Orleans lost business because there were no people around to use a hotel - not from the hurricane itself. The case was heard in a court in Britain, where the insurer was based.

New Zealand insurers have regularly cited the case since February 22, 2011, says Hooker. "The insurance company says 'Orient Pacific - we are not paying your claim'. I say the insurance industry cannot base a blanket rule on a piece of UK case law on a particular policy ... it is of limited application in New Zealand."

For these and other reasons many Christchurch claims have stalled, says Sheldon. One of her clients, for example, was paid for only half the time its own engineer and contractors spent reinstating its plant, because the insurer decided this was an operational cost. Had the business used outside engineers, the entire claim would have been paid.

"The anecdotal position we hear," says Sheldon, "is that insurers are seeking settlements that are less than the full amount of cover even where companies have incurred total loss of their business, and business owners are accepting less than a full payout because it is called a negotiated settlement. They are forced to because they need some cash. The insurers withhold payments because you are not agreeing to the settlement."

Hay has seen businesses outmaneuvered in this way. "I am concerned for the whole category of business owners," she says. "I don't want to sound like a whingeing person from Christchurch.

"Every time a saving is made by an insurer it is a loss to New Zealand in terms of future investment potential. In their pursuit of savings they are hurting New Zealand. That is all going under the radar."

One of Hay's biggest problems is the business interruption insurance claim for her school. She expected regular payments from NZI within the 12-month indemnity period to cover her loss of profits. Despite progress payments of $307,900 (GST inclusive) on a sum insured of $529,000, Hay is still waiting for the claim to be finalised.

She says the NZI-appointed assessor told her verbally in April this year that he was recommending the insurer pay $150,000 to settle the food and wine school business interruption claim. She thought that was pitifully short of what she should have been paid.

Then, to her horror she found the amount had been reviewed down by $100,000 before being sent to NZI.

But NZI denies the assessor ever said the final payment would be $150,000. "The assessor's report did not recommend $150,000, it recommended $40,000," it says. "We paid $50,000 which we believe was an appropriate amount based on the information provided and further discussions that we had with Celia."

Further discussion stalled because the insurer asked Hay for details of revenue from her new Auckland School of Food and Wine. The insurer's argument was that Hay - who had accelerated long-term plans to open a new school in Auckland - had simply upped and moved the business north. It wanted to offset any Auckland revenue against the Christchurch claim payment.

This week, however, it dropped those demands.

Hay's frustration with the claim settlement process is palpable. "What is business interruption insurance about?" she asks. "It's about getting you up and running again. Somehow this key goal has been lost in the rubble of the earthquake."

Thanks to the uncertainty over the business interruption claim on the school, she was unable to make business decisions for months on end. "I don't want to spend any money on marketing. I'm scared to employ more people. If I get insurance money, I am not going to burn it. I am going to invest it in my businesses."

The Hay case is not unusual. Hooker had a similar experience with a Christchurch retailer, which before the February earthquake had plans for another Christchurch branch. "It was in the early stages of planning, and hadn't physically opened," he says. "When it opened after the earthquake the insurance company decided it wanted to offset revenues of that new store against its payout for the destroyed branch."

Many business owners have also paid dearly for taking a No 8 wire approach to fixing problems. "People are being penalised for taking action, when they had no real obligation to do so," says Hooker.

When a client's Christchurch business was put out of action by the quake, the owner redeployed staff to his Rangiora branch to keep them busy - even though there was no work for them. "The insurer is refusing to pay the lost wages," says Hooker. "My client says: 'I have a staff of people sweeping things they don't need to sweep. The insurance company said we have redeployed our people there and used the offset clause [not to pay]."' If the staff had been twiddling their thumbs the owner would have been paid.

Hooker cites another example, a medium-sized manufacturing business whose building was "munted" but still standing. The owner got some timber, propped up the building and covered it with a tarp to get back into business.

Because the owner kept things operating, he didn't immediately need his 12 months' business interruption cover. Now the insurance company is ready to do the repairs and the business will be closed temporarily, he could do with the payout, but the cover was only valid for the year from February 22, 2011, and has now expired.

The business owner, says Hooker, had assumed he could hit the pause button and claim the business interruption cover when he needed it. Not so, said the insurer.

Canterbury Earthquake Recovery Minister Gerry Brownlee has heard of similar cases and says insurers "need to think very carefully what their obligations are in those circumstances. Reputationally there is an issue for insurers to consider.

"At some point the businesses will need to cease operating for a period, [yet] the period under which business interruption insurance runs has expired. The insurers need to be reasonable about it and say because they didn't have capacity [to settle the claim earlier] they have disadvantaged the businesses who had cover with them.

"It is unreasonable that [insurers] have protected their position by disadvantaging the people who had cover with them."

But Brownlee also says every business with business interruption insurance should pull out the policy and read it. "Quite often they have gone to a broker and got a cheap option without being fully aware of what [the policy] means. There are too many [businesses] I have come across who say 'I have business interruption insurance, but frankly I have never read the policy'."

And Brownlee says insurers are not getting enough credit for continuing to offer insurance in Christchurch. As he points out, "many countries don't have insurance."

Lessons from the shaky city

The aftermath of the Christchurch quakes has been an eye-opener for business owners and insurers alike. Gary Young, chief executive of the Insurance Brokers Association of NZ, recommends firms with business interruption cover consider the following:

* Negotiate the longest business interruption cover possible. Some insurers will offer two years. One year might be enough if your factory burns down. But if there is widespread damage in a city or region, one year will probably not be enough.

* Speak to your advisers before lodging a claim. That includes your insurance broker, lawyer and accountant. "Some [Christchurch] business owners seem to have gone ahead with doing things which have subsequently disadvantaged themselves," says Young. "Policies can be quite complicated in this area and you need to make sure you are doing the right thing."

* Keep really good records, including data backups. Owners who take the traditional shoebox approach to keeping records could find themselves unable to prove their claim.

* Dispute resolution services which insurance companies belong to such as the Insurance & Savings Ombudsman can hear complaints about small business claims. In the case of the ombudsman, the ceiling for claims to be considered is $200,000.